Bitcoin is the first of its kind. It is a protocol, and a network. It is a currency, a commodity, a stock, a bond, a ledger, a store of value, an accounting system, a bank, a payment system ... all rolled into one system, that is global and entirely decentralized. The core strength is that it serves as a ledger for the chain of ownership for anything you can imagine, as of today (2014), this is currency.
Bitcoin is based on an open source protocol created by "Satoshi Nakamoto". There are a lot of definitions surrounding it such as
digital currency. It is transferred person-to-person directly with no middle-man (read: bank), the network entirely sustains itself and has no single point of failure and no central authority.
What is the Bitcoin Protocol?
The Bitcoin protocol was developed by Satoshi Nakamoto. It is the protocol
(think - HTTP to render webpages, SMTP to transfer e-mail, TCP/IP for all computer to computer communications, SOAP for the transfer of data between dis-similar networks, etc) which runs the Bitcoin network, which - at it's core - is simply a decentralized means of tracking ownership of a "coin" - that "coin" can have an unlimited number of real world associations.
This was created as an open-source
protocol, meaning, anyone can submit work for review to be included in the protocol and no single person "owns" the protocol. As a protocol, any number of future possible applications can be built on top of it.
It also means, that anyone can review the code of the protocol, change it themselves, and create their own work using this protocol as a basis - creating a new, entirely seperate, system.
The active running protocol for the anything using the Bitcoin Protocol - is the version that is most widely used by all running mining nodes in the network. The current version (2016) of the Bitcoin Protocol that is most widely used is maintained by the Bitcoin Core
Other notable implementations that run the same base software (and thus, the Bitcoin Protocol) are:
You can read more about the protocol here: https://en.bitcoin.it/wiki/Protocol_specification
What is the Bitcoin Network?
The Bitcoin network itself is based upon the original Protocol.
It is this network, which makes up the basis of Bitcoin.
The initial (2009) usage for Bitcoin, is as a form of Digital Currency to replace government backed, centralized currencies (FIAT). You can read the whitepaper of the network here: bitcoin.pdf
The first block - called the Genesis Block
- was mined on January 3, 2009.
This block contained the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" - so it could be proven that the block was not pre-mined and occurred on or after this headline.
Who is Satoshi Nakamoto?
Nobody really knows. It is a person/group who designed the Bitcoin protocol which went live in January of 2009. The real information behind who it was is a mystery, but there have been
quite a few speculations. In Japanese Satoshi translates into "clear-thinking; quick-witted; wise." "Naka" can mean "inside" or "relationship" while "moto" is defined as "the origin; the cause; the foundation; the basis." So we have "clear-thinking" "inside" "the foundation." You can find more information here: https://en.bitcoin.it/wiki/Satoshi_Nakamoto
On March 6, 2014 - Newsweek broke a story claiming to have found Satoshi Nakamoto. You can find the article here: link
. However, the community seems to have disproved that this data is correct.
What is known, is that whoever (or whatever) Satoshi Nakamoto is/was, about 1 million bitcoin were mined to addressed used by that person/team.
What makes Bitcoin different from other cryptocurrencies?
Cryptocurrencies have existed since the internet started. They were called Electronic Money, the first of which was DigiCash
but all of these failed at one important thing, that Bitcoin solved. The proof-of-work that solves the "double-spend" problem to allow decentralization. It is this key reason, that Bitcoin is the first of its kind. See: Wikipedia on Cryptocurrency
Other cryptocurrencies have appeared after the invention of Bitcoin. The first most notable (as of 2013) is Litecoin
which uses a 2 minute block time instead of 10, and uses Scrypt
instead of SHA-256
Many others have appeared (hundreds) - but the free market determines which have a value or not over time. Every coin other than bitcoin, is called an Alt-Coin.
What is the proof of work?
The proof of work is used in Mathmatics (read here
). In Bitcoin, the proof of work is what is used to validate the next block and all blocks before it. See this
What is a block?
A block simply contains all the transactions that have occured on the network which the miner adds that were unconfirmed, which then become confirmed.
The Bitcoin network, uses a block time of 10 minutes. This means, that based on the amount of miners on the network (see hashrate
), the difficulty
to solve each block increases, so that blocks are found - on average - every 10 minutes.
This calculation is re-checked every 2016 blocks.
Blocks also contain a record to both the previous and next blocks, forming a chain referred to as the blockchain. See this
What is the blockchain?
The blockchain is the public ledger of all transactions in the Bitcoin network, going all the way back to the genesis block
. This should NOT be confused with the website www.blockchain.info
which is a private company that displays lots of information about the blockchain, and provides a secure wallet.
The longest chain, is always the chain that is determined to be the "valid" chain. There can be branches of chains that exist for a time, but ultimately, whatever chain becomes longest, is assumed to be the correct one.
What backs Bitcoin?
Unlike traditional FIAT currencies which are backed by a government (and the forcing of people/companies in its jurisdiction to use it), or precious metals which are backed by many things such as scarcity/does not degrade over time/is impossible to fake/has a predictable supply/etc, Bitcoin is backed solely by the network that supports it, by the people who use it, and by the companies that use it.
Bitcoin takes the properties that make FIAT and precious metals useful (a definitive chain of ownership, ease of use, scarcity, etc). Yet, there is no central authority, no government, no pretty shining metal - it gets its value and usefulness by the system itself being useful and unbreakable.
If you read into what money actually is, or what gives gold/silver/etc their backing ... the core of it, is usefulness and mass adoption.
See: Why do we value gold?
and Value of the U.S. Dollar
How do I get Bitcoin?
There are 4 ways to get Bitcoin.
1. Buy it by converting an existing FIAT currency for it.
2. Be a Merchant that accepts it for goods or services.
3. Mine it
4. Receive it as a gift
Regardless of the method of obtaining it, Bitcoin is sent to a public address that you own the private key for.
How do I buy Bitcoin?
You buy bitcoin via an exchange, or from another person. If you live in the US, the most widely used method of purchase is Coinbase - link
However there are many others you can purchase from, like Circle
The other alternative is from an exchange like Bitstamp
. Many exchanges will tie to your bank account and transfer funds using ACH transfers, which you then use to purchase coins at the current exchange rate.
Another method, is to buy it from another person. You can do this with your friends, or setup a meet with someone on a website such as LocalBitcoins
What Exchanges are good to use?
Up until 2014 - the most used Exchange was Mt. Gox
which was based in Japan - it however, was proved to not be solvent and closed in January 2014.
Exchanges's I've used are:
- used for many newer Alt-Coins
- run by the Winkelvoss twins.
- run anonymously
- used to Buy Bitcoin and exchange to US dollars - requires verifying identity - uses ForEx for money transfer if used.
Failed Exchanges have been:
- allows USD deposits if using a verified account - used to trade Alt-Coins
- clean site - used for Alt-Coins
How do I get Bitcoin as a gift?
Someone can gift you bitcoin using what's called a Paper Wallet. Bitcoin Paper Wallet
is an example of this. Where a public/private key is generated client-side, and then you can print out the information, send funds to it, and give it to someone (or store it yourself offline).
How do I mine Bitcoin?
Mining is the process by which the unconfirmed transactions become confirmed.
You mine bitcoin by either installing the bitcoin-qt software or joining a mining pool and then running a mining software (like cgminer) that uses your CPU/GPU/ASIC cards to solve hashes.
What you are looking for with this software, is the Nonce
that is used to provide the proof-of-work for the block that confirms the block as valid.
Mining uses difficulty, to scale the network so that on average, there is a block found every 10 minutes. See (Mining Difficulty
You can see who has mined each block, by viewing the Hashrate Distribution
What is Mining, specifically?
The first miner to provide the proof gets the btc reward called the coinbase.
If you are a solo miner, then you get that reward all to yourself. Early mining was done completely solo, currently - most miners join a mining pool.
The reward is halved approximately every 4 years (specifically, every 210,000 blocks) (originally, 50 btc, then 25btc, now 12.5 btc etc) until the last reward will be given out in the year 2140.
The reward also includes the miners fee (transaction fee) and the miner gets that as well. - At some point in the future (10-30 years), the miners fee should outweigh the block reward (assuming adoption of the system).
Take a look at pooled mining and how it works for a quick overview. https://en.bitcoin.it/wiki/Pooled_mining
(altho this is more than a year old for info, a lot of pools use PPLNS - Pay Per Last N Shares - where N is split out into shifts (usually 10) - so you are paid on your contribution shares per shift (which the length of the shift increases with the difficulty of the network))
The majority of miners, are in pools and share the reward with everyone who contributed.
See for example, this block:
the reward was 25 BTC to the founder (in this case, BTC Guild pool)
the transaction fees were .04195001 BTC (203 total transactions) so the total that BTC Guild got for this block was 25.04195001 BTC.
This was then put into the Pool's findings during this timeframe, and paid out to the contributors working during those shifts based on what amount they contributed.
In this block, the Nonce (see: https://en.bitcoin.it/wiki/Nonce
) was found to be 519830912 (think, starting from the number 0 and trying every number until one matches, in this case, took 519M tries - in lamen terms)
This is the "complex math" that everyone talks about: https://en.bitcoin.it/wiki/Block_hashing_algorithm
How do I receive Bitcoin?
You receive bitcoin, using your public address. This address will look something like this: 18dAhXSeeazgVSmYF78o4z34Z9XUpN7Njj
People send bitcoin to this public address, and once confirmed, the coins are then associated with this address and not with their previous address.
are widely used to contain the public address instead of typing the long string above.
How do I send Bitcoin?
Using your wallet software. You send coins that you control (own the private key to), to any public address.
You cannot send anything without the private key. And you cannot send anything you do not have. In this way, it is not possible for someone else to send your coins, or for you to send coins you do not posesses.
The private key is NEVER
given out publicly to the network, even when sending coins. What is sent, is a signature that can only be created using the public/private keys. See Bitcoin Transactions
Vendors will and are arising to accomplish this task for you as well, as easily as possible. One company gives you a debit card, which you can use at any of their POS termials. This is Coinkite
How do I sell Bitcoin?
You can sell Bitcoin in the same way that you buy it. Through an Exchange (Such as Bitstamp
, etc), through a payment processor (Coinbase
, etc), or locally to another person (LocalBitcoins
How do I accept Bitcoin as payment for goods/services?
Typically, if you want to convert back to FIAT you would use a merchant account system. These systems use callbacks so you can tie order information to the data sent to the site and track who orders what.
A few examples of these are Coinbase link
. These services typically come with a 1% or flat per-month fee to auto-convert bitcoin to FIAT currency.
Of course, you can accept payment directly in bitcoin yourself with no 3rd party required - using your own wallet.
On July 30, 2014 - BitPay
changed to a $0 / 0% forever policy. So it costs nothing to accept and convert bitcoin for your business.
Why would I use Bitcoin over regular credit cards?
Look at your credit card processing fees
. Chances are, you are paying at least 4% on every transaction. Using services from Coinbase
, you would only be paying 1% (or fixed per month) if you chose to convert Bitcoin transactions to FIAT currency. If you keep your payment in Bitcoin, there is usually little to no fees. This is a HUGE
savings and is the single greatest reason a Merchant should look into accepting Bitcoin.
What is a Wallet?
A wallet, is just a collection of public keys (addresses) that are derived from the private key(s) in the wallet. The wallet also contains the private key associated with the change address(s).
Types of Wallets
Software Wallets - Wallets that run locally on your computer. (Bitcoin-QT)
Mobile Wallets - Wallets that run on a mobile phone. Such as Mycelium
Web Wallets - Wallets that are hosted by a 3rd party website. Such as BlockChain.info
Paper Wallets - Wallets that are printed on paper and stored entirely offline. (BitcoinPaperWallet
Where can I get a wallet?
What about Volatility?
As with any free market, price goes up and down based on supply/demand. That means, that at any given time, the conversion rate of BTC to any FIAT currency will change.
If you enjoy volatility as a trader, this is a good thing, as the market goes up/down, you can buy/sell to turn a profit.
As a merchant, you may not want to deal with the volatility of the price. So you simply price your product in whatever FIAT currency you wish, the buyer sees that price auto-converted to BTC, you take the BTC as payment and it's automatically converted back to FIAT for you. (see the 3rd party payment systems for this method).
The point is, you can worry about volatility, or not. It is entirely up to you. But volatility in a free market, is a totally normal thing.
Either Bitcoin will fail, or it will succeed, there is no middle ground - "logarithmic, hold onto your hats, this is going to be a wild ride"
Is this a long term investment?
It can be. Speak with your financial advisor on if this is a long term investment for you or not. (assuming your Financial Advisor knows anything about Bitcoin) The general consensus is "do not invest more than you are willing to lose" - this is true for any investment - be it bitcoin, or stocks, or anything else.
Where can I check the current price?
There are a few, personally I like: Bitcoin Average
However, if you want to see prices in Satoshi, use the site you are on now
A good graph based site is: Bitcoinity
Another great graph based site with alarms and many alt-coins is: BitcoinWisdom
A great Android app to check price (and get alerts) is Bitcoin Checker
To me, the only price that matters currently (until FIAT is no longer needed), is what I can get if I want to buy/sell a bitcoin for FIAT (USD). So for me, Coinbase
is the only price that matters.
How many Bitcoin are there?
There will be a total of 21,000,000 Bitcoin by the year 2140. The "reward" for each solved block started at 50 coins awarded, and is halved about every 4 years (210,000 blocks). See: Controlled Currency Supply
However, Bitcoin is expressed with 8 digits past the decimal place. Ex: 1 BTC = 1.00000000 BTC and so the actual usable units of value is 100,000,000 * 21,000,000 = 2,100,000,000,000,000 units of value. This number can be increased as needed with simple code changes.
10 minutes per transaction is long, my credit card happens instantly?
Actually, your credit card doesn't confirm funds for up to 120 days after you discover a problem - or 540 days after the transaction (see Credit Card Chargeback rules). Within those 120 days, the funds can be reversed by the payee/financial institution and the merchant can not get that money.
What happens instantly, is that upon attempting to spend money on your credit card, a verification is done that checks that your available balance will allow the transaction at that moment.
Bitcoin does this at the core of the system. You can not spend coins you do not own (balance > what you are attempting to spend) and if someone was attempting to double-spend, it would need to occur at almost the same moment - so within seconds, you can be very certain there is no double-spend occuring.
The coins are then verified within approximately 10 minutes, and CAN NOT be reversed after those 10 minutes. - Compared to Credit Cards where a transaction can be reversed up to 540 days later.
Typically, as long as the recommended mining fee is included in the transaction, it can be assumed that the transaction *should* get into a block. As of Feb 2014, plans are in place for a payment protocol change to allow a better guarentee that the mining fee is included in the transaction.
How much does it cost to send Bitcoins inside the network?
Bitcoins get included in transactions on a priority basis by the miners. (see: Transaction Fees
If you do not include a mining fee on your transaction, it could take weeks or months before the miners actually include the transaction. So by including a small (as of 1/6/14 this is about .0001 btc) amount in the mining fee, will guarentee the transaction to get into one of the next 1-2 blocks.
The mining fee is paid for by the SENDER of the coins. Not the receiver.
Say for example, you want to send 0.1 coins from X to Y. If you only have 0.1 coins in your wallet, you would not be able to send that amount. As you would only be able to send 0.0999 coins, since you need to include the recommended mining fee of .0001 (as of 1/6/2014)
How does change work?
All transactions contain inputs and outputs. Since there is no guarentee that the sum of the inputs will match the outputs, change must be given. Change is simply, the remainder of the inputs-outputs which is sent to an address. See Change
How many possible addresses exist?
Under the current model of encryption (RIPE-MD160) there are approximately 2^120 addresses - or 1,461,501,637,330,902,918,203,684,832,716,283,019,655,932,542,976 possible addresses. For perspective, the total number of grains of sand on the planet earth is only 2^63 estimated.
What is an "Alt-Coin"?
An Alt-Coin is simply another coin that has been created using the Bitcoin Protocol as a basis.
As of December 2013, there are about 110 different Alt-coins. You can trade them at exchanges such as: Poloniex
Early notable coins are/were:
In 2014, there was a big push to be more anonymous. New coins sprung up to solve this problem, some notable ones are:
DarkCoin (rebranded to Dash)
Coins also appear that are industry specific. In June 2016, TitCoin was created.
Coins also appeared to work as contracts. Ethereum
was the first to do this but many others have also attempted it.
Coins have appeared to store files (like dropbox) - Storj
are examples of this.
Since "alt-coins" are simple to create - almost anybody can create them. That also means, they can live and die very quickly. Typically, once listed on an exchange, an alt-coin will live and die by the price that the market gives to it. If there is little to no trading volume, the coin will be delisted, which usually marks its death. If the coin trades well, and developers keep active, the coin can continue on for quite a while. It's certainly possible in the future, that an "alt-coin" replaces Bitcoin as the most widely used coin.
What is 2FA or Two-Factor Authentication?
2FA or Two-Step Authentication
is setting up a logon to something to use Two methods of authentication.
For example, a password AND a code that is sent to an SMS number or e-mail address.
Or a password AND a code that is provided by an application running on a phone.
The most basic method, is an SMS code sent via Text-Message to your phone number upon attempting to log on.
is an application maintained by Google which also does this for you.
However - I like to use a program like: Authenticator Plus
over google wallet because you can backup the keys and re-import them (if you change your phone out).
2FA is HIGHLY
recommended on any website that you store anything of value on. It should protect against people being able to log into a website by simply knowing your username and password.
What is an exchange?
An exchange is simply a website that "exchanges" bitcoin for something else. For example, exchange bitcoin for litecoin or dogecoin or FIAT currency.
It should be noted, and STRESSED that an exchange is a 3rd-party. *ANY* funds you move to an exchange are *NOT* controlled by the bitcoin network and are solely controlled by the exchange. (as of Mar 2014).
What this means, is that an exchange can and has closed/been hacked/stolen customer funds, and currently, there isn't anything you can do about it.
The most notable, happened in February 2014 when one of the first and biggest exchanges (Mt. Gox) stopped all trading and declared bankruptcy. Other exchanges have closed or been hacked.
store funds on an exchange that you are not willing to lose, and DO NOT
use an exchange in place of your own wallet.
Some examples of an exchange are: Bitstamp
If you do not want to use an exchange, sites such as Shapeshift
have appeared which will convert between different coins for you without an account. (you just need a wallet address for each coin).
Where can I buy things using Bitcoin?
Increasingly, more and more locations are accepting bitcoin as a form of payment.
There are a few websites dedicated to tracking these sites, for example: Spendbitcoins
, or Coinmap
Also, the Bitpay Merchant List
and Coinbase Client List
are good starting points for vendors who convert bitcoin to FIAT upon purchase.
Some of the major retailers that started accepting bitcoin, are:
- Added January 2014
- Added January 2014
- Added June 2014
- Added July 2014
- Added July 2014
Is a Bitcoin fungible?
Currently (March 2014) the answer is yes, and no.
First - take a look at what fungibility is over at Wikipedia
. One bitcoin currently has the same value as another, there is no difference.
However - the origins of a bitcoin can be tracked all the way back to when it was added to the network as a block reward. Bitcoin is not (yet) truely anonymous. (see Anonymity
). So it is possible for a bitcoin to - in the future - NOT be fungible. This would not be a good thing, as fungibility is a requirement of a currency system.
There are (as of March 2014) some proposed changes to make sure that Bitcoin is truely anonymous and fungible, one of these is: Zerocoin
DISCLAIMER: This is a collection of information that *I* have discovered myself. It is by no means a comprehensive list, nor should it be used as definitive information. I will do my best to keep the list as accurate as possible.